Offshore Drilling Rule Would Stifle Gulf Production: Report

By: Jennifer A Dlouhy, Bloomberg BNA

As the Obama administration readies new offshore drilling regulations designed to prevent a repeat of the Deepwater Horizon oil spill, the oil and gas industry is lobbying for final hour adjustments.

Announced last April by Secretary of the Interior Sally Jewel, the rule would tighten standards on blowout preventers – the device that failed in the case of Deepwater – as well as put more controls on how companies drill and monitor wells deep under the surface of the ocean. It comes at a time the collapse of crude prices is already forcing the industry to scrap major projects worth billions of dollars.

The rule is expected to go before the Office of Management and Budget within the next few weeks for economic analysis. There industry lobbyists hope to make the case that the rule as written would decimate a domestic offshore industry already reeling under historic lows in the price of oil and natural gas and posing a threat to economies along the Gulf of Mexico.

A study released Monday by the Gulf Economic Survival Team – an industry group founded by Louisiana Governor Bobby Jindal in 2010 in response to a post-Deepwater drilling moratorium – predicts the rule would raise costs to such a degree the number of exploratory wells drilled each year would fall by 55 percent.

Conducted by the consulting firm Wood Mackenzie, the report forecasts a 35 percent drop in oil production from the Gulf by 2030, resulting in more than 100,000 jobs lost, mostly in Texas and Louisiana.

“It is important that we conduct further study of the finer points and practical effects of this new rule before forcing it on companies engaged in operations in the Gulf,” Lori LeBlanc, executive director of the Gulf Economic Survival Team, said in a statement. “Our nation as a whole would feel the impact of reduced domestic energy production stemming from this rule, with a particularly harsh blow to Gulf energy-producing states. ”

Since its announcement last year, the rule drawn up by the Bureau of Bureau of Safety and Environmental Enforcement has drawn partisan debate around the cost of protecting the country’s seas from oil spills.

At a hearing before the senate Energy and Natural Resources Committee in December, senators faced off on the impact on the energy sector.

“Since 2010, there have been 23 separate ‘loss of well control incidents’,” Sen. Maria Cantwell, D-Washington, said in the hearing. “We can’t afford this kind of risk.”

None, of course, compare to the explosion of the Deepwater Horizon rig. Operated by BP, it was drilling close to a mile beneath the water’s surface when a surge of natural gas blew out the well. Eleven workers died in the explosion, and it was months before BP could plug the well. After years of civil litigation, a federal district judge determined BP spilled 3.19 million barrels into the ocean.

Last year the company settled with the U.S. and five state governments for $20 billion, the largest settlement with a single entity in U.S. history, according to the Justice Department. The accident also emboldened environmental groups that have long lobbied for a shift away from fossil fuels.

Sara Smith, an attorney with Environment Texas, said while she was pleased the government was working to reduce spills it did not go far enough.

“No amount of tinkering with the mechanics of drilling is going to make it a safe activity,” she said. “We think the most prudent course of action would be to stop drilling all together.”

The question of the economic impact of the proposed rule has intensified this year with the continued fall out in the price of oil, which briefly dropped below $30 a barrel last month.

U.S. oil companies have laid off tens of thousands of workers, while watching their stock price tumble.

With the prospect of further regulation coming, Industry lobbyists are targeting provisions within the offshore rule that fix industry to drilling wells within strictly defined parameters, stifling innovation, LeBlanc said.

“There are at least a dozen instances where BSEE departs from or exceeds industry standards with no additional safety benefit,” she said in an email.

Determining what economic impact those rules will have is the cause of divide itself.

BSEE estimates the reduction in oil spills and offshore accidents would actually create a net benefit of more than $650 million over ten years.

“There will be some costs [for drillers],” said Gregory Julian, spokesman for the bureau. “But the standards are already being implemented by many of the operators – just not all of them.”

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